Word of the Week: Explicit Cost

As a business owner, one of the easiest things to identify is explicit cost.

The most common examples of explicit costs include wages, utilities, rent, raw materials, and other direct expenses companies pay to conduct business.

For example, a bakery who makes cakes, cookies, or pastries knows that more than likely there will be an increase rise in raw materials and rent. That includes the sugar the baker must buy to produce their merchandise. The business owner must determine how to pay that added explicit cost is a crucial part of the company’s business strategy.

On the other hand, the business will face implicit cost. An implicit cost is a cost that stems from the opportunities a business loses due to way it allocates resources. Think of it this way. The bakery owner who spends time looking for other distributors instead of expanding their company’s offering is an implicit cost of running their business. Implicit cost is not as tangible as explicit cost, but it is just as important.

Explicit costs are cash outflows that are easy to track on the financial statements. They provide a clear impact on profits and a company’s bottom line.

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Disclaimer: This blog is for information purposes only and is not intended to provide investing, accounting, tax or legal advice and should not be relied upon.